Oil prices, what is happening…

Posted on May 4, 2015

Since many weeks, oil prices are falling. Everyone is eagerly watching market and some are in panic for these events specially in countries where economy is based on natural resources e.g. Canada. In Canada this year so far many have lost their job and specially Alberta has suffered a lot due to dip in oil prices. But, there is an interesting question what may be the bottom of oil price?

Some people believe that it has reached bottom but some do not and believe that it might hit $12! In my opinion, oil might go down as there are political disturbance in European region specially Russia, Iran and Middle East. These countries have power to change the oil prices and one of the major reason why oil went down too much low because of excess supply of crude oil from these countries at lower prices.

Crude oil has been declined more than 50% in last one year with very sharp decline in last 8 months. What it means? Is it an indication for global economy slowdown? There are many such questions arises.

We need to consider what drives the oil prices beyond supply and demand. Let’s see who are major producers of oil – Saudi, Iran, Russia, and Canada. USA was mainly consumer and was importing oil but in recently it is becoming oil producer as well. So in general it can be think of that one of the biggest buyer is turning into a seller. What is gonna happen to commodity? simple, less demand and more supply driving prices lower. But it does not mean that it is indication of global slowdown. However, it needs to consider a major impact for global economy due to oil/energy.

Second point is that demand in China for energy increasing but is that significant increase to cover up demand due to USA? It is difficult to say at this point. However if demand for energy keep soaring in China and other Asian countries, it may lead oil prices to new heights in coming future. Various economic sources say that Chinese economy is slowing down. Keeping this fact in mind, one should not be very optimistic for oil prices to boost up in near future.

One also need to watch out political changes happening which indirectly may affect oil production in Saudi Arabia which is world’s largest oil producer with the capacity to pump more than 12 million barrels of crude oil if needed.

China, Japan and South Korea are world’s huge importers of oil. If there is even slight drop in their import e.g. 1%, it will save billions of dollars on their balance sheet. Japan is struggling with their trade deficit already.

From an academic view, market is solving demand and supply equation in new ways. There is more oil coming into the market then its demand due to oil production in USA, coming back of Libyan oil production after Quaddfi turmoil.

In simple terms, global political disturbances have significant power to change oil demand and supply equation which is one of the major point in oil market ups and down.